“As goes January, so goes the year”—also known as the January Barometer—is a market theory that states returns in January predict those for the rest of the year. It first appeared in the 1970s and remains popular among some traders. If true, it looks like 2024 is going to be a good one for investors in Canada. Current market conditions likewise seem to be making the case to “sell in May and go away.”
While I personally do not follow or recommend this well-worn saying, its staying power is undeniable. With May within sight, Canadian investors should know what it’s all about and whether it should influence their tactics. (Read about tax-loss harvesting, too.)
What is “Sell in May and go away”?
The saying refers to a seasonal investment strategy that has investors selling their equities on or around May 1, holding those proceeds in cash, and then using this cash to buy back the same stocks after Halloween.
Why? Historically the markets tend to underperform from May to September and outperform from October to April. Whether the months of May and October underperform or outperform tends to vary each year. And here it becomes a question of which came first, the chicken or the egg?
Why “Sell in May and go away” keeps coming back
Rumour has it the investing strategy (although I think the word “strategy” is too generous a term) emerged hundreds of years ago in England. The timing is the result of summer holidays. Stock brokers would take vacation starting in May and return back to work in September and October.
All these years later, money managers in the United Kingdom and North America, among other places, continue to go off to their lake houses and elsewhere for the summer, leading market activity to drop off. There are simply fewer trades taking place during this period.
With so little volume, any market event—positive or negative—can be magnified. However, behavioural science tells us that we are wired to fixate on the negative and are quick to forget the positive. More than this, we know based on the numbers that the difference in performance between these two periods hasn’t been all that significant and, in some cases, the theory hasn’t held true at all. For example, July 2023 was a fantastic month for the markets. The NASDAQ rose 4.1% to 37.7% on the year and the S&P 500 grew 3.2% and was up 20.7% on the year.
That said, this year it may make sense to sell in May because we have a situation where the markets are at a high point and potentially overvalued, which means it may be a good idea to take some of those profits.
My take: People often like patterns, and there’s an appeal to use them as guides when making decisions. It should also be noted that patterns are everywhere. If you want to find one, you will. That doesn’t mean you should invest based solely on a recurring event.
Patterns look great until something changes and then they don’t anymore. If you’re an investor or money manager, like I am, and something breaks in the pattern, then you have to quickly change your whole strategy. That’s not easy to do on the fly, and it also forces you to chase the next pattern. That’s why I make sure I’m aware of any significant patterns and why they’re happening but, ultimately, focus on the fundamentals in my decision making.
The fundamentals are fundamental for a reason
The reality is, even if one stock or industry or index is down, somewhere another is up. Put another way, there’s always a good investment for your money. You just have to find it, and that requires understanding the situations and events affecting the markets and individual companies. It helps to focus on the fundamentals—that is, metrics that can identify good quality investments that are trading at a bargain. If that investment pays a dividend, even better.
Read more about investing:
- Best online brokers in Canada
- A guide to the best robo-advisors in Canada
- The best RRSPs in Canada
- The best FHSAs in Canada
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